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5 years ago

IPO performance and earnings expectations: some French evidence

IPO performance and earnings expectations: some French evidence

Next we extend the

Next we extend the previous test, using the entire set of ex ante variables at our disposal for IPO companies, to see if other ex ante variables explain Analyst Forecast Errors (AFE) or Prospectus Forecast Errors (PFE). The regressions presented in table 5 - Panel B confirm our previous results : the main drivers of analyst optimism are the length of the forecast horizon and the size of the company. We also observe that analysts are more optimistic for Nouveau Marché (vs. Second Marché) offerings and for low book-to-market companies, which confirms the link between ex ante uncertainty and analyst optimism. 6.3.2.4 Do Analyst Forecast Errors depend on the affiliation of the analysts who issued the prediction? In their 2000 paper, Dechow, Hutton and Sloan, though they analyze growth forecasts instead of yearly forecast errors, find that those errors vary a lot with analysts’ affiliation. We use the same categories of analyst’s affiliation as in their paper. An observation can be assigned 4 values: - 1 if the analyst who produced the forecast is affiliated with the lead underwriter of the deal and no other forecast was issued for this firm / period, - 2 if the analyst who produced the forecast is affiliated with the lead underwriter of the deal and other forecasts were issued by non-affiliated analysts for this firm / period, - 3 if the analyst who produced the forecast is not affiliated with the lead underwriter of the deal and an affiliated analyst issued a forecast for this firm / period, - 4 if the analyst who produced the forecast is not affiliated with the lead underwriter of the deal and no forecast was issued by an affiliated analyst for this firm / period. This classification is summarized in the following two-entry table: Analyst Affiliation Affiliated Non-affiliated Is there at least a forecast by Yes 2 3 an analyst of the other type? No 1 4 22

Dechow, Hutton and Sloan (2000) show that forecast errors increase with the type of the observation. This can be explained by the following arguments. First affiliated analysts are more likely to be over-optimistic about the company’s future around an IPO. This can be the consequence of a « strategic behavior », affiliated analysts having incentives to give a positive image of the IPO company. This can also be the consequence of a « naive behavior », namely the fact that the underwriters chosen to list the company may suffer from a winner’s curse, that is they may be chosen because their valuation of the company is the highest among all potential underwriters. Thus, 1 and 2 types of forecasts (made by affiliated analysts) should be more biased than the 3 and 4 types. Second, if we assume that analysts of one type can be influenced by predictions issued by analysts of the other type, as the result of a strategic choice or of a naïve behavior, then analysts’ predictions are likely to be more polarized when there is only one type of analysts that follow the firm. Hence, we expect forecasts of type 4 to be less biased than forecasts of type 3 (that are likely to be influenced by type-2 forecasts), and similarly type-1 forecasts to be more biased than type-2 predictions (that are likely to be influenced by type-3 forecasts). The results on analyst forecast errors by analyst affiliation are presented in Table 6. In the first row of the table, average AFEs are all significantly negative at usual levels for all types of affiliations, and AFEs decrease in magnitude with the type: the more “affiliated” the analyst, the more optimistic he is.In the next rows, we present the same statistics for each period. The previous results hold. Another test of whether affiliation matters is presented in Table 6. We calculate correlation coefficients between forecasts in pre-IPO prospectuses and forecasts by analysts around IPO dates. If affiliation matters, we expect to find that correlation decreases with affiliation type 14 . 14 For this to be true, we also need that both prospectus forecasts and analysts’ forecasts matter. Indeed, if one of those forecasts was considered irrelevant by the market, we could expect the analysts in charge of issuing it to put very low effort in it and finally, this parameter would take almost random, or at least meaningless values. 23

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